Sometimes the cure is worse than the ill: an occasional look into the life of LSE DESTIN 2010

The Future of the Shrinking North: Immigration and Offshoring

The post “The Shrinking North and the Elusive Quest for Labor Force” prompted some interesting questions from one of our reader , Nila who works for a company which uses offshoring to create jobs for the people in developing countries. In particular she asked: “What type of labor will the North need immigrants for, and what jobs do you think will start going offshore (offshore means moving jobs outside the country, different from outsourcing which is moving the jobs out of the company) because of the labor shortage?”. I did some research and what follows is my (best) educated guess.

Firstly, in America and Europe manufacturing as share of GDP has declined dramatically and labor is bound to move out manufacturing into services. The reason behind such structural shift is that rapid productivity increase outpaced demand growth thus causing the employment in the manufacturing sector to drop. In other words technology advances have enabled factories to produce more with fewer people. As Stiglitz explains, the West was the victim of its own success. This trend is unlikely (read impossible) to reverse hence labor in developed countries will be concentrated in the service sector. As a result the demand for less-skilled workers will likely drop. On this basis, the short answer to the first question is services.

Confronted with this structural shift of jobs moving from manufacturing to services, governments will have a series of options to deal with the labor shortage. The most likely option envisages letting more qualified and skilled immigrants in through what it is called “selective immigration”, in order to fill to gap. This is an almost inevitable outcomes given that governments need to pay for the pensions of the baby-boomers who are soon to retire and this will be a long-term need and not temporary in nature (Human Development Report 2009). However, even if governments will be able to repeal some restrictive anti-immigrations laws, some of the jobs will go offshore. Why?

Until recently only manufacturing jobs were considered to be subject to offshore outsourcing, but now this is not the case anymore: service jobs can also be moved across countries. There are two factors which drive this phenomenon: firstly the presence a large pool of qualified workers, especially in India and China, which can perform more complex tasks associated with service jobs; secondly, technology advances in computing and communication which widens the range of jobs which can be moved to another country. Alan Blinder and Alan Krueger, professors of economics at Princeton, argue that any service jobs which can be delivered down a wire with little or no degradation in quality has the potential of being moved to another country. In their views there are jobs which are personal and other which are impersonal. The former require face-to-face interaction and the presence in loco of the person offering the services (think about a taxi drivers, plumbers or doctors), the latter not (think about accountants and computer programmers). The first cannot be offshored, the second can.

Having said that, not all the jobs which can be offshored will be. As the Economist explains in the case of the manufacturing sectors, industries whose product needs to be produced close to where is consumed is unlikely to be shifted across countries because the gains resulting from lower labor costs would be offset by higher transportation costs. The car sectors is an example. Furthermore, it is difficult to say now what jobs are personal or impersonal given that technological changes might occur in the future and transform some of the personal jobs into impersonal.

Lastly, let us return to the first question about the kind of jobs the North will need immigrants for. The first part of the post concluded that these jobs will be in the service sector. Part of the conventional wisdom holds that jobs demanding highly-skilled laborers are more likely to stay in developed countries whereby low-skilled to be offshored. However, if one accepts the category of personal and impersonal, people employed in personal jobs, both highly and less skilled, are the most likely to retain their jobs in the North.